Concessions in lease-up properties still common in many markets

Lease-up concessions remain common in top development markets, according to research by RealPage, a provider of comprehensive property management software solutions. Among the top 15 markets that RealPage looked at, Chicago came in sixth, with reported concessions of 7.4 percent in March.

These 15 markets—which combined have received roughly half of all new supply delivered in the U.S. since 2010—are witnessing larger than average giveaways during this cycle. As annual apartment completion volumes remain at their highest point in more than three decades, the flood of new units to the market is broadening the options for prospective renters. In this more competitive leasing environment, it should be no surprise that rent concessions designed to entice renters are commonplace at lease-up properties.

Nationally, the share of apartments offering rent discounts has actually reduced, driven by a shift away from the practice in recent years among stabilized properties. For properties in lease-up, however, the drive to fill as many units as quickly as possible has led to more concessions among this segment of the rental market.

Filling units quickly can be more challenging in high-supply markets. The inventory in the top 15 markets has grown roughly 11 percent this cycle. As of March 2018, the average rent discount among lease-up properties in these markets totaled roughly 7 percent, the equivalent of about three weeks free.

In general, the 15 high-development markets seeing the largest lease-up giveaways also have seen apartment completions more concentrated geographically. Atlanta, which tops the list with concessions of 9.1 percent in March, has seen development mostly localized to a handful of historically high-performing submarkets in the urban core and northern suburbs. Likewise, construction has been focused downtown and in affluent northern suburbs of Dallas, where rent concessions averaged 7.9 percent in March. On the other hand, high-development markets seeing the smallest rent discounts offered by operators of lease-up properties are those in which development is more spread out geographically. Boston, which ranked last on the list with 5.0 percent in concessions, saw construction activity spread out from the urban core.

Chicago reported concessions of 7.4 percent in March, with 22,958 units delivered since 2015. Across Chicago, robust construction in the core outpaces net absorption, meaning vacancy will edge higher in the city this year as completions reach new highs. More than half of all deliveries in 2018 are expected to be in the urban core, pushing vacancy up in the Loop and other downtown neighborhoods as supply outstrips demand.

If higher concession values are driven by increased competition stemming from higher levels of new supply, then the gulf between stabilized and lease-up concessions signals that competitive pressures are currently concentrated among new properties. The bulk of new properties are high-priced, luxury product, leading to Class A properties that underperform on the pricing side at the national level. Annual increases in effective monthly rents at luxury product have trailed middle market and lower-tier product since early 2016. In the first quarter of 2018, Class A rent growth measured 2.3 percent, trailing the 2.8 percent increase in Class B units and the 2.6 percent increase in Class C product.